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Bachelor of Business Administration
(BBA)
BBA-7
Management Accounting
Block-1
Introduction To Cost AccountingUnit-1 Cost Accounting
Unit-2 Classification of Cost
Unit-3 Cost Sheet
Subject Experts
Professor Nripendra Narayan Sarma, Maniram Dewan School of Mangement, KKHSOU Professor Munindra Kakati, VC, ARGUCOM Professor Rinalini Pathak Kakati,Dept.of Busniess Administration, GU
Course Coordinator : Dr. Smritishikha Choudhury, Asst. Prof., KKHSOU
Dr.Chayanika Senapati, Asst. Prof., KKHSOU
SLM Preparation Team
UNITS CONTRIBUTORS1-3 Dr. Pradeep Kr. Jain
Gauhati University
Editorial TeamContent : Dr. Arup Roy, Tezpur University
Structure, Format and Graphics : Dr. Smritishikha Choudhury,KKHSOUDr. Chayanika Senapati, KKHSOU
November, 2018
This Self Learning Material (SLM) of the Krishna Kanta Handiqui State Open University is made available under a Creative Commons Attribution-Non Commercial-ShareAlike4.0 License (International) : http.//creativecommons.org/licenses/by-nc-sa/4.0
UNIT 1: COST ACCOUNTING
UNIT STRUCTURE
1.1 Learning objectives
1.2 Introduction
1.3 Meaning of Cost Accounting
1.4 Objectives of Cost Accounting
1.5 Cost accounting, financial accounting and management
accounting
1.5.1 Difference between cost accounting and financial
accounting
1.5.2 Meaning of management accounting
1.5.3 Difference between Cost accounting and management
accounting
1.6 Advantages of Cost Accounting
1.7 Limitations of Cost Accounting
1.8 Let Us Sum Up
1.9 Further Reading
1.10 Answers to Check Your Progress
1.11 Model Questions
1.1 LEARNING OBJECTIVES
After going through this unit, you will be able to
explain the meaning & objectives of Cost Accounting
explain the difference between Cost Accounting and Financial
Accounting
describe the meaning of Management Accounting
outline differences between Cost Accounting and Management
Accounting
discuss the advantages and limitations of Cost Accounting
1.2 INTRODUCTION
In this unit we are going to discuss the meaning and objectives
of cost accounting and its various advantages and disadvantages. Cost
accounting means keeping account of the costs of items in production.
After that you will get a fair idea on the meaning of management
accounting.
The difference between cost accounting, financial accounting and
management accounting will also be discussed.
1.3 MEANING OF COST ACCOUNTING
Cost Accounting is one of the important disciplines of accountancy
to give proper information required to the management for effectively
discharging its functions such as planning, organizing, controlling, directing,
co-coordinating and decision making. In this regard, Financial accounting
is concerned with record keeping directed towards the preparation of
Profit and Loss Account and Balance Sheet. It provides information about
the enterprise in a general way. Accordingly Financial Accounts are
prepared as per the requirement of the Companies Act and Income Tax
Act. The main purpose of financial accounting is to ascertain profit or
loss of a concern as a whole for a particular period. Thus, financial
accounting does not serve as the needs of management for effective
control, determination of prices, making effective plan for future operations
and formulating various policy decision.
To overcome the limitations of the financial accounting, the cost
accounting is a recent development born in response to the needs of
management for detailed information about cost of a product or a unit
of services. Every business firm is expected to make profit in the long
run and keep costs within control. Recently the Companies Act has
made obligatory the keeping of cost records in some manufacturing
companies. In essence, therefore Cost Accounting is now widely used
by large manufacturing and non-manufacturing operations.
1.4 OBJECTIVES OF COST ACCOUNTING
The following are the important objectives of Cost Accounting :
1) Ascertainment of cost.
2) Determination of selling price.
3) Cost control and cost reduction.
4) Ascertainment of profit of each activity.
5) Assisting Management in decision making.
6) Formulating business policy.
7) Matching costs with revenue.
1.5 COST ACCOUNTING, FINANCIAL ACCOUNTING ANDMANAGEMENT ACCOUNTING
In this section we will discuss about the difference between cost
accounting, financial accounting, and management accounting.
1.5.1 Difference between Cost accounting and FinancialAccounting
The following are the differences between Financial Accounting
and Cost Accounting:
Point of Financial Accounting Cost AccountingdifferencePurpose It is prepared for The main purpose of
providing information Cost Accounting is toabout the final results provide information toof the business the management foractivities as a whole the proper planning,for a particular period control and decisionto its proprietors, making.outsiders etc.
Need Financial Accounts are Cost accounts aremaintained as per maintained to meetthe requirements of the requirement ofCompanies Act and the management
Income Tax Act.
Cost accounting:
It is the process ofrecording, classifying,analysing and allocatingcosts associated with aprocess and developingcourses of action tocontrol the costs.
Recording Transactions are In cost accounting,
classified, recorded transactions are
and analysed classified recorded
subjectively. and analysed
objectively according
to the purpose for
which costs are
incurred.
Analysis of Financial accounting Cost Accounting
reveals the profit of shows the profit
a business as a made on each
whole. product, job or
process
Accounting Financial accounts are Cost reports are
Period prepared for a definite prepared frequently
period. and submitted to the
management may be
daily, weekly etc.
Stock In financial accounts, Cost accounting
stocks are valued at stocks are valued at
cost price or market cost.
price which ever is
less.
Dealings Financial accounts Cost account lays
deal with actual facts emphasis on both
and figures. actual facts and
estimates or
predetermined cost.
Relative Financial accounts do Cost account provides
Efficiency not reveal the relative information on the
efficiency of each relative efficiencies of
department or section. various plant and
machinery
Financial accounting:
It is the process ofrecording, summarisingand reporting themyriad of transactionsresulting from businessoperations over a periodof time.
1.5.2 Meaning of Management Accounting
Management Accounting: Management Accounting helps
the management in effectively performing its functions of planning,
organizing, controlling, coordinating and decision making.
The Institute of Cost and Management Accountants,
London, has defined Management Accounting as “the application
of professional knowledge and skill in the preparation of accounting
information in such a way as to assist management in the
formation of policies, and in the planning and control of the
operations of the undertaking.”
1.5.3 Difference between Cost Accounting andManagement Accounting
Cost Accounting Vs Management Accounting
The following are the main distinctions between Cost
Accounting and Management Accounting :
1) Cost Accounting deals with cost ascertainment, cost allocation,
cost apportionment and cost control. Management Accounting
provides all accounting in formations to the management for
discharge of its functions effectively.
2) Management Accounting has a wider scope as compared to
cost accounting. Therefore management accounting uses
more advanced techniques of Management reporting.
3) Management accounting deals with both Cost Accounting and
Financial Accounting. But cost accounting deals with cost
data.
4) Standard Costing, Budgetary Control, Break-Even Analysis,
Inventory Control etc. are the basic tools and techniques used
in Cost Accounting. But in Management Accounting, fund flow
analysis, cash flow analysis, ratio analysis etc. are the
important tools used for analysis and interpretation of financial
statement.
1.6 ADVANTAGES OF COST ACCOUNTING
Cost Accounting helps the management to ascertain the true
cost of every operation, through setting objectives and standard of
operation, comparison of actual performance with standard to reveal the
discrepancies or variances. If the variances are adverse, the management
takes up corrective measure to eliminate variations. The following are
the advantages of cost accounting to the management, to the employees,
to the creditors, to the government and to the public.
Advantages to the management
1) Facilitates planning.
2) Helps in formulating policies.
3) Useful in setting up objectives and standards of performance.
4) Facilitates cost comparison.
5) Leads to effective cost control.
6) Determines the selling price.
7) Ascertains profit of each activity.
8) Assists the Management in decision making.
9) Facilitates cost reduction.
10) Measures performance.
Advantages to the Employees
1) Ensures fair incentive wage schemes.
2) Facilitates job security, recognition and promotion.
3) Useful in measuring operating efficiency of the employees.
Advantages to the Creditors
1) Measures the financial strength and creditworthiness of the
business.
2) Attract investors for extending their credit facilities.
3) Creates trustworthiness among the creditors, debenture
holders, banks etc.
Advantage to the Government
1) It helps to formulate business policies and national plans for
industrial development.
2) It facilitates assessment of taxation, and establishment of
indexes.
3) It assists in effective utilization of resources, i.e. materials,
labour and machines etc.
4) It assists the government for cost reduction, price fixation,
export and import and granting subsidy etc.
Advantage to the public
1) It helps in elimination of wastages and inefficiencies.
2) It facilitates the consumers to pay fair price for products.
3) It leads to progress of national economic growth.
4) Creates employment opportunities.
5) Increases the living standards of the people.
1.7 LIMITATIONS OF COST ACCOUNTING
The following are some of the limitations of cost accounting :
1) There is lack of uniformity in regard to its procedure and practices.
2) Cost are classified and interpreted in such different manners that
though given the same title, they are computed on a different basis.
3) Lack of consistency becomes more acute when projections are
made beyond the recorded cost data.
4) Inherent limitations of cost accounting objections raised by different
sections of business societies against the introduction of cost
accounting.
5) Cost accounting is unnecessary for recently established industries.
And also modern methods of costing systems are not suitable for
all types of industries.
6) Cost accounting system involves considerable amount of
expenditure at the installation stage. Thus costing system is not
economical for a small concern.
7) Cost accounting involves accounting procedures and record-
keeping. These are far more detailed and difficult than those required
in financial accounting.
CHECK YOUR PROGRESS:
Q1: Fill in the blanks :
a) Cost accounting is used by large
................................... and ................................
operations
b) Cost accounting deals with ……………… , ………………..
and ………………………………
c) Cost accounting stocks are valued at ………………………
d) Financial accounts are prepared for a …………….. period
e) Cost accounting shows the profit made on each …………,
……………………. and process.
Q2: State two objectives of cost accounting.
.......................................................................................................
.......................................................................................................
1.8 LET US SUM UP
Cost Accounting is one of the important disciplines of accountancy
to give proper information required to the management for effectively
discharging its functions such as planning, organizing, controlling,
directing, co-coordinating and decision making
The following are the important objectives of Cost Accounting :
1) Ascertainment of cost.
2) Determination of selling price.
3) Cost control and cost reduction.
4) Ascertainment of profit of each activity.
5) Assisting Management in decision making.
6) Formulating business policy.
7) Matching costs with revenue
Management Accounting helps the management in effectively
performing its functions of planning, organizing, controlling, and
coordinating and decision making.
We have also discussed the difference between cost accounting
and management accounting and financial accounting.
At the end we discussed the advantages and disadvantages of
cost accounting.
1.9 FURTHER READING
1. Jain P K & Khan MY(2017); Management Accounting,7edition
Mcgraw Higher Ed, India
2. Narang K.L. & Jain S.P.(2015), Cost Accounting, Kalyani Publications
3. Narang K.L. & Jain S.P(2015), Cost And Management Accounting,
4. Lal J & Srivastava S (2013), Cost & Management Accounting;
Mcgraw Higher Ed
5. Banerjee(2013);Cost Accounting: Theory and Practice; PHI Learning
Pvt Ltd; New Delhi
1.10 ANSWERS TO CHECK YOUR PROGRESS
Ans to Q1. a. manufacturing, non-manufacturing
b. cost ascertainment, cost allocation and cost control
c. Cost
d. definite
e. product, job and process
Ans to Q2. i) Ascertainment of cost.
ii) Determination of selling price.
1.11 MODEL QUESTIONS
Q1. What do you understand by Cost Accounting?
Q2. What are the important objectives of Cost Accounting?
Q3. What are the differences between financial account and cost
accounting?
Q4. Distinguish between cost accounting and management accounting.
Q5. Cost Accounting has become an essential tool of management.
Give your comments on this statement.
Q6. Indicate the various advantages and limitations of Cost Accounting.
*** ***** ***
UNIT 2: CLASSIFICATION OF COST
UNIT STRUCTURE
2.1 Learning objectives
2.2 Introduction
2.3 Cost concept
2.4 Techniques of costing
2.5 Classification of Cost
2.6 Let Us Sum Up
2.7 Further Reading
2.8 Answers to Check Your Progress
2.9 Model Questions
2.1 LEARNING OBJECTIVES
After going through this unit, you will be able to
describe the cost concepts
explain the techniques of costing
discuss the Classification of Cost
2.2 INTRODUCTION
In the earlier unit, we come to know about the concept of cost
accounting and its different objectives. Now in this unit we are going to
discuss the classification of cost and the various techniques of costing.
You will find this unit interesting, as it discuss about the costing methods
like job and process costing and the five different techniques of costing.
2.3 COST CONCEPT
The term ‘methods’ and ‘systems’ are used synonymously to
indicate an integrated set of procedures based on a complex concept
of ideas, principles and concepts. The term method of costing refers to
cost ascertainment. Different methods of costing for different industries
depend upon the production activities and the nature of business. For
these, costing methods can be grouped into two broad categories : (1)
Job costing and (2) Process costing.
1. Job Costing: Job costing is also termed as specific Order Costing
(or) Terminal Costing. In job costing, costs are collected and
accumulated according to jobs, contracts, products or work orders.
Each job is treated as a separate entity for the purpose of costing.
The material and labour costs are complied through the respective
abstracts and overheads are charged on predetermined basis to
arrive at the total cost. Job costing is used in printing, furniture
making, ship building etc.
Job costing is further classified into (a) Contract costing (b) Cost
plus contract and (c) Batch costing.
a) Contract Costing : This method of costing is applicable
where the job work is big like contract work of building. Under
this method, costs are collected according to each contract
work. Contract costing is also termed as Terminal costing.
The principles of job costing are applied in contract costing.
b) Cost plus Contract : These contracts provide for the
payment by the contracted of the actual cost of manufacture
plus a stipulated profit. The profit to be added to the cost. It
may be a fixed amount or it may be a stipulated percentage
of cost. These contracts are generally entered into when at
the time of undertaking a work, it is not possible to estimate
its cost with reasonable accuracy due to unstable condition
of material, labour etc. When the work is spread over a long
period of time, the prices of materials, rates of labour etc.
are liable to fluctuate.
Costing Methods
Job Costing Process Costing
Complied :Act in accordance withsomeone’s rules, commandsor wishes.Overheads :The expense of maintainingproperty
c) Batch Costing : In Batch Costing, a lot of similar units
which comprise the batch may be used as a cost unit for
ascertainment of cost. Separate Cost Sheet is maintained
for each batch by assigning a batch number. Cost per unit
of product is determined by dividing the total cost of a batch
by the number of units of the batch. Batch Costing is used
in drug industries, ready-made garments industries, electronic
components manufacturing T V Sets, etc.
2. Process Costing: This costing method refers to continuous
operation or continuous process costing. Process costing method
is applicable where goods or services pass through different
processes to be converted into finished goods. Process costing is
used in Cement industries, Sugar industries, Textiles, Chemical
industries etc.
The following are the important variants of process costing system.
a) Operation Costing : It is concerned with the determination
of the cost of each operation rather than process. It offers
scope for computation of unit operation cost at the end of
each operation by dividing the total operation cost by total
output of units.
b) Operating Costing : Operating costing is also termed as
service costing. Operating costing is similar to process
costing and is used in service industries. This method of
costing is suitable for concerns rendering services. For
example, Hospitals, Transport, Canteen, Hotels etc.
c) Output Costing : Output costing is also called Unit Costing
(or) Single Costing. This method of costing is applicable
where a concern undertakes mass and continuous production
of single unit or two or three types of similar products or
different grades of the same products. Under this method,
cost per unit is measured by dividing the total cost by number
of units produced. Output Costing is used in industries like
Cement, Cigarettes, Pencils, Quarries etc.
d) Multiple Costing : This method of costing means
combination of two or more methods of costing like operation
costing and output costing. Under this method, the cost of
different sections of production are combined after finding
out the cost of each and every part manufactured. This
method of costing is suitable for the industries manufacturing
motor cars, engines, aircraft, tractors, etc.
2.4 TECHNIQUES OF COSTING
Costing is the technique and process useful to allocation of
expenditure, cost ascertainment and cost control. In order to fulfill the
needs of the management, it supplies necessary information to the
management. The following are the various techniques of costing:
a. Uniform Costing
b. Marginal Costing
c. Standard Costing
d. Historical Costing
e. Absorption Costing
a) Uniform Costing: Uniform Costing is not a distinct method of
costing. In fact when several undertakings start using the same
costing principles and or practices, they are said to be following
uniform costing. The basic idea behind uniform costing is that the
different firms in an industry should adopt a common method of
costing and apply uniformly the same principles and techniques
for better cost comparison and common good.
b) Marginal Costing: The C.I.M.A. London defines marginal costing
as “a technique of costing which aims at ascertaining marginal
costs, determining the effects of changes in costs, volume, price
etc. on the Company’s profitability, stability etc. and furnishing the
relevant data to the management for enabling it to take various
management decisions by segregating total costs into variable
and fixed costs.”
Segregating :Separate or isolate one thingfrom another.
c) Standard costing: Standard Costing is a technique of cost
accounting which compares the standard cost of each product or
service with actual cost to determine the efficiency of the operation,
so that any remedial action may be taken immediately.
d) Historical Costing: Historical costing is the ascertainment and
recording of actual costs when or after, they have been incurred
and is one of the first stages in the growth of the Cost Accountant’s
work. Actual costs refer to material cost, labour cost and overhead
cost.
e) Absorption Costing: Absorption Costing is also termed as Full
Costing (or) Orthodox Costing. It is the technique that takes into
account charging of all costs both variable and fixed costs to
operation processed or products or services.
CHECK YOUR PROGRESS
Q1: Fill in the blanks :
a) Costing methods can be grouped into two
.. broad categories: (1) ……………….......
(2) …………………………
b) Job costing is also termed as specific Order Costing
(or) …………………………………
c) Process Costing method refers to ………………………
d) Multiple Costing method of costing means combination
of …………………………………… methods of costing
Q2: What are the various techniques of costing?
a. ………………………………
b. ………………………………
c. ………………………………
d. ………………………………
e. ………………………………
2.5 CLASSIFICATION OF COST
Classification is the process of grouping costs according to their
common characteristics or features. There are various methods of
classifying costs on the basis of requirements.
The following are the important bases on which costs are
classified :
a) On the basis of Nature (or) Elements.
b) On the basis of Function
c) On the basis of Variability.
d) On the basis of Normality.
e) On the basis of Controllability and Decision Making.
The following chart can explain further the classifications cost:
1) On the basis of Nature or Elements: One of the important
classification cost is on the basis of nature or elements. Based on
elements, it is classified into Material Cost, Labour Cost and Other
Expenses. They can be further subdivided into Direct and Indirect
Material Cost, Direct and Indirect Labour Cost and Direct and
Indirect Other Expenses.
Classification of cost
Nature or Element
a. Material Costb. Labour Cost c. Other
expenses
Function
a. Production Costb. Administration
Cost c. Selling Costd. Distribution Cost
Variability
a. Fixed Costb. Variable Costc. Semi-
variable/fixedcost
Normality
a. Normal Cost b. Abnormal
Cost
Decision Making &
Controllability
a. Controllable Cost b. Uncontrollable
Costc. Sunk Cost d. Opportunity Coste. Replacement Costf. Conversion Cost
2) On the basis of Function: The classification of costs on the
basis of the various functions of a concern is known as function-
wise classification. Here, there are four important functional divisions
in the business organization. viz. (a) Production Cost (b)
Administration Cost (c) Selling Cost and (d) Distribution Cost.
3) On the basis of Variability : On the basis of variability with the
volume of production cost is classified into Fixed Cost, Variable
Cost and Semi Variable Cost. Fixed Costs are those costs which
remain constant with the volume of production. Rent and rates of
office and factory building are some example of fixed cost.
Variable costs are those costs incurred directly with the volume of
output. For example, cost of materials and wages to workers are
the expenses chargeable with direct proportion to the volume of
production.
Semi-Variable Costs are those costs incurred partly fixed and partly
variable, with the volume of production. Accordingly, it has both
fixed and variable features. For example, depreciations and
maintenance cost of plant and machinery.
4) On the basis of Normality: Costs are classified into normal costs
and abnormal costs on the basis of normality features. Normal
costs are those incurred normally within the target output or fixed
plan.
5) On the basis of Controllability and Decision Making: Based
on the managerial decision making and controllability the
classif ications are as follows: (a) Controllable Cost, (b)
Uncontrollable Cost, (c) Sunk Cost, (d) Opportunity Cost, (e)
Replacement Cost, (f) Conversion Cost.
a) Controllable Costs : Controllable Costs are the costs which
can be influenced by the action of a specified number of an
undertaking. Controllable Costs incurred in a particular
responsibility centre which is influenced by the action of the
executive heading. For example, direct materials and indirect
materials.
b) Uncontrollable Costs: Uncontrollable Costs are those costs
which cannot be influenced by the action of a specified
number of an undertaking. In fact, no cost is controllable; it
is only in relation to a particular individual that may specify
a particular cost to either controllable or non-controllable. For
example, rent and rates.
c) Sunk cost : These are historical costs which were incurred
in the past and are not relevant to the particular decision
making problem being considered. While considering the
replacement of a plant, the depreciated book-value of the old
asset is irrelevant as the amount is a sunk cost which is to
be written-off at the time of replacement. Unlike incremental
or decremental costs, sunk costs are not affected by increase
or decrease of volume. Examples of sunk cost include
dedicated fixed assets, development cost already incurred.
d) Opportunity Cost: Opportunity cost means the cost of
forgoing or giving up an opportunity. It is the notional value of
going without the next best use of time, effort and money.
These indicate the income or potential benefits sacrificed
because a certain course of action has been taken. An
example of opportunity costs is the market value forgone or
sacrificed when an old machine is being used.
e) Replacement Cost: Such expenses may be incurred due to
factors like change in method of production, an addition or
alteration in the factory building, change in flow of production
etc. All such expenses are treated as production overheads;
when amount of such expenses is large, it may be spread
over a period of time.
f) Conversion Cost: Conversion costs are those costs which
are incurred while converting materials into semi-finished or
finished goods. It is the aggregate of direct wages, direct
expenses and overhead costs of converting raw materials
into finished products.
CHECK YOUR PROGRESS
Q3: What are the important bases on which costs
are classified ?
a) ...................................................................................................
b) ...................................................................................................
c) ...................................................................................................
d) ...................................................................................................
e) ...................................................................................................
Q4: What are the important bases on which managerial decision
making and controllability is classified?
..................................................................................................
..................................................................................................
..................................................................................................
2.6 LET US SUM UP
In this unit we discussed the following concepts:
Costing methods can be grouped into two broad categories:
(1) Job costing and (2) Process costing.
In job costing, costs are collected and accumulated according to
jobs, contracts, products or work orders.
Job costing is further classified into (a) Contract costing (b) Cost
plus contract and (c) Batch costing.
Process costing method is applicable where goods or services
pass through different processes to be converted into finished
goods.
Costing Methods
Job Costing Process Costing
The following are the important variants of process costing
system.
a) Operation Costing
b) Operating Costing
c) Output Costing
d) Multiple Costing
Costing is the technique and process useful to allocation of
expenditure, cost ascertainment and cost control
The following are the various techniques of costing:
a. Uniform Costing
b. Marginal Costing
c. Standard Costing
d. Historical Costing
e. Absorption Costing
The following are the important bases on which costs are
classified :
a) On the basis of Nature (or) Elements.
b) On the basis of Function
c) On the basis of Variability
d) On the basis of Normality
e) On the basis of Controllability and Decision Making.
2.7 FURTHER READING
1. Jain P K & Khan MY(2017); Management Accounting,7edition
Mcgraw Higher Ed, India
2. Narang K.L. & Jain S.P.(2015), Cost Accounting, Kalyani
Publications
3. Narang K.L. & Jain S.P(2015), Cost And Management Accounting,
4. Lal J & Srivastava S (2013), Cost & Management Accounting;
Mcgraw Higher Ed
5. Banerjee(2013);Cost Accounting: Theory and Practice; PHI
Learning Pvt Ltd; New Delhi
2.8 ANSWERS TO CHECK YOURPROGRESS
Ans to Q1: a. (1) Job costing and (2) Process costing.
b. Terminal Costing
c. continuous process costing.
d. two or more
Ans to Q2: The following are the various techniques of costing:
a. Uniform Costing
b. Marginal Costing
c. Standard Costing
d. Historical Costing
e. Absorption Costing
Ans to Q3: The following are the important bases on which costs are
classified :
a) On the basis of Nature (or) Elements.
b) On the basis of Function
c) On the basis of Variability.
d) On the basis of Normality.
e) On the basis of Controllability and Decision Making.
Ans to Q4: Based on the managerial decision making and controllability
the classifications are as follows: (a) Controllable Cost,
(b) Uncontrollable Cost, (c) Sunk Cost, (d) Opportunity Cost,
(e) Replacement Cost, (f) Conversion Cost.
2.9 MODEL QUESTIONS
Q1. What are the important methods of Costing? Describe each of
them briefly.
Q2. What are the important techniques of costing?
Q3. What method of costing would you recommend for the following
industries? Give reason.
a) Ship Building
b) Ready-made Garment
c) Sugar Industries
d) Hospitals
e) Cigarettes
f) Motor Cars manufacture.
Q4. Describe the different classification of cost in detail.
Q5. What are the important basic requisites for classification of cost?
Explain them briefly.
Q6. Write short notes on:
a) Uniform Costing.
b) Historical Costing
c) Marginal Costing.
d) Standard Costing
e) Sunk Costing
Q7. What are the differences between controllable costs and
uncontrollable costs?
*** ***** ***
UNIT : COST SHEET
UNIT STRUCTURE
.1
.2
.3
.4
.5
.6
.7
.8
Learning Objectives
Introduction
Elements Of Cost
.3.1 Materials Cost
.3.2 Labour Cost
.3.3 Expenses
Specimen of Cost Sheet
Let Us Sum Up
Further Reading
Answers to Check Your Progress
Model Questions
.1 LEARNING OBJECTIVES
After going through this unit, you will be able to
• explain elements of Cost.
• define material cost, labour cost and Expenses.
• explain Overheads and Cost Sheets.
• outline specimen of Cost Sheet
.2 INTRODUCTION
In the earlier unit, you have been acquainted with job costing and
contract costing. In this unit we are going to discuss another important
topic, i.e. cost sheet and the various items associated with it. One
important area to claim your attention is “elements of cost” which includes
different costs, materials cost, labour costs and expenses. A detailed
examination of each of these items is expected to enlighten you on the
main subject of this unit i.e. Cost Sheet.
.3 ELEMENTS OF COST
Meaning :
Elements of cost are necessary to have a proper classification and
analysis of total cost. Thus, elements of cost provide the management
with necessary information for proper control and management decisions.
For this purpose, the total cost is analysed by the elements or nature
of cost, i.e. material, labour and overheads. The various elements of
costs may be illustrated as below :
Elements of Cost
Materials Labour Other Expenses
Direct Indirect Direct Indirect Direct Indirect
Over heads
Production or Administration Selling Overhead Distribution
Factory Overhead Overhead
By grouping the above elements of cost, the following divisions of
cost are obtained :
1) Prime Cost = Direct materials + Direct Labour +
Direct Expenses
2) Work Cost (Factory) = Prime Cost + Factory Overhead
3) Cost of Production = Factory Cost + Office and
Administrative Overhead
4) Cost of Sales (or)
Total Cost = Cost of production + Selling and
Distribution overhead
.3.1 Materials Cost
Materials Costs refer to cost of materials which are the major
substances used in production and are converted into finished
goods and semi-finished goods. Materials are grouped as direct
materials and indirect materials.
Direct Materials : Direct materials are those that form part of
product. Raw materials, semi finished products, and finished
products which can be identified with production of a product are
known as direct materials. Sugarcane, cotton, woods etc. are
examples of direct materials .The cost of materials involves
conversion of raw materials into finished products.
Indirect materials : Material costs, other than direct material
cost are known as indirect material cost. Indirect materials cannot
be identified with a particular unit of cost or product. Indirect
materials are indirectly used for producing the products. Lubricating
oil, consumable stores, fuel, design, layout etc. are examples of
indirect material cost.
.3.2 Labour Cost
In actual production of the product, labour is the prime factor
which is physically and mentally involved. The payment of
remuneration of wages is made for their effort. The labour costs
are grouped into (a) Direct Labour and (b) Indirect Labour.
a) Direct Labour : Direct labour cost or direct wages refer to
those, specifically incurred for or can be readily charged to
or identified with a specific job, contract, work order or any
other unit of cost are termed as direct labour cost. Wages
for supervision, Wages for foremen, Wages for labours who
are actually engaged in operation or process are examples
of direct labour cost.
b) Indirect Labour : Indirect labour is for work in general. The
importance of the distinction lies in the fact that whereas
direct labour can be identified with and charged to the job,
indirect labour cannot be so charged and has therefore to be
treated as part of the factory overheads to be included in the
cost of production. Examples are salaries and wages of
supervisors, store keepers, maintenance labour etc.
.3.3 Expenses
All expenses are other than material and labour that are incurred
for a particular product or process. They are defined by ICMA as
“The cost of service provided to an undertaking and the notional
cost of the use of owned assets.” Expenses are further grouped
into (a) Direct Expenses and (b) Indirect Expenses.
a) Direct Expenses : Direct expenses which are incurred
directly and identified with a unit of output or process are
treated as direct expenses. Hire charges of special plant or
tool, royalty on product, cost of special pattern etc. are the
examples of direct expenses.
b) Indirect Expenses : Indirect expenses are expenses other
than indirect materials and indirect labour, which cannot be
directly identified with a unit of output. Rent, power, lighting,
repairs, telephone etc. are examples of indirect expenses.
Indirect expenses are those expenses which are incurred
after the manufacturing of goods.
Overheads
All indirect material cost, indirect labour cost, and indirect
expenses are termed as overheads. Overheads may also be
classified into (a) Production or Factory Overhead (b) Office and
Administrative Overheads (c) Selling Overhead and (d) Distribution
Overhead.
a) Production Overhead : Production Overhead is also termed
as Factory Overhead. Factory overhead includes, indirect
material, indirect labour and indirect wages which are incurred
in the factory. For example, rent of factory building, repairs,
depreciation wages of indirect workers etc.
b) Office and Administrative Overhead : Office and
Administrative Overhead is the indirect expenditure incurred
in formulating the policies, establishment of objectives,
planning, organizing and controlling the operations of an
undertaking. All office and administrative expenses like rent,
staff salaries, postage, telegram, general expenses etc. are
example.
c) Selling Overhead : Selling Overhead is the indirect expenses
which are incurred for promoting sales, stimulating demand,
securing orders and retaining customers. For example,
advertisement, salesmen’s commission, salaries of salesmen
etc.
d) Distribution Overhead : These costs are incurred from the
time the product is packed until it reaches its destination.
Cost of warehousing, cost of packing, transportation cost
etc. are some of the examples of distribution overhead.
CHECK YOUR PROGRESS
Q1. What is overhead?
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Q2. Give some exmaples of direct expenses.
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Q3. State true or false for the following statements:
(i) Lubricating oil, fuel, designs are some examples of direct
material cost.
(ii) Rent, power, telephone bills etc. are some of the example
of indirect expenses.
.4 SPECIMEN OF COST SHEET
Meaning : Cost Sheet or a Cost Statement is “a document which
provides for the assembly of the estimated detailed elements of cost in
respect of cost centre or a cost unit.” The analysis for the different
elements of cost of the product is shown in the form of a statement
called “Cost Sheet”. The statement summarises the cost of
manufacturing a particular list of product and discloses for a particular
period :
I) Prime Cost
II) Works Cost (or) Factory Cost;
III) Cost of Production;
IV) Total Cost (or) Cost of Sales.
Importance of Cost Sheet
1) It provides for the presentation of the total cost on the basis of the
logical classification.
2) Cost sheet helps in determination of cost per unit and total cost
at different stages of production.
3) Assists in fixing of selling price.
4) It facilitates effective cost control and cost comparison.
5) It discloses operational efficiency and inefficiency to the
management for taking corrective actions.
6) Enables the management in the preparation of cost estimates to
tenders and quotations.
SPECIMEN OF COST SHEETCost sheet for the Period ...........
Particulars Total Cost Cost Per Unit
Rs. Rs.
EXERCISE : 1
From the following particulars, prepare a Cost Sheetshowing (1) Cost of Materials Consumed (2) PrimeCost (3) Factory Cost (4) Cost of Production and (5)Profit.
Rs.Opening Stock of raw materials 20,000Opening Stock of work in Progress 10,000Opening stock of finished goods 50,000Raw materials purchased 5,00,000Direct wages 3,80,000Sales for the year 12,00,000Closing stock of raw materials 75,000Closing stock of work in progress 15,000Factory overhead 80,000Direct expenses 50,000Office and Administrative overhead 60,000Selling and distribution expenses 30,000
Solution : 1
Cost Sheet for the year ..................Particulars Amount Amount
Rs. Rs.
Particulars Amount Amount
Rs. Rs.
CHECK YOUR PROGRESS
Q4. What is cost sheet?
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Q5. List three important factors of cost sheet.
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.5 LET US SUM UP
In this unit, we have discussed about cost sheet. Cost sheet is
the analytical presentation of total cost, i.e. material, labour and overhead
cost. Cost sheet is a document which provides for the assembly of the
estimated detail elements of cost in respect of a cost unit. Cost sheets
assist in fixing of selling price. It also enables the management in the
preparation of cost estimates to tenders and quotations.
.6 FURTHER READINGS
1. Management Accounting: Khan & Jain
2. Cost Accounting : Hongren
3. Cost & Management Accounting: Jain & Narang
4. Cost Accounting: B. Banerjee
.7 ANSWERS TO CHECK YOURPROGRESS
Ans to Q1. All indirect material cost, indirect labour cost, and indirect
expenses are termed as overheads
Ans to Q2. Hire charges of special plant or tool, royalty on product, cost
of special pattern etc. are the examples of direct expenses.
Ans to Q3. (i) False, (ii) True
Ans to Q4. Cost Sheet or a Cost Statement is “a document which
provides for the assembly of the estimated detailed elements of
cost in respect of cost centre or a cost unit.”
Ans to Q5. 1) It provides for the presentation of the total cost on the
basis of the logical classification.
2) Cost sheet helps in determination of cost per unit and total
cost at different stages of production.
3) Assists in fixing of selling price.
.8 MODEL QUESTIONS
Q1. What do you understand by cost sheet? Briefly explain with
specimen of cost sheet.
Q2. Explain the different elements of total costs.
Q3. Explain the importance of cost sheet.
Q4. Explain the different functional classification of overheads.
Q5. Distinguish between :
a) Direct material and Indirect material
b) Direct labour and Indirect labour.
c) Direct expenses and Indirect expenses.
Q6. From the following particulars of a manufacturing firm prepare a
statement showing :
1) Cost of Materials Consumed
2) Factory or Work Cost
3) Cost of Production
4) Profit
Cost of Production Rs.
Stock of materials on 1st January 2003 80,000
Purchases during the period 22,00,000
Stock of finished goods on 1st January 2003 1,00,000
Direct wages 10,00,000
Sales 48,00,000
Factory on cost 3,00,000
Office and Administrative Expenses 2,00,000
Stock of raw materials on 31st December 2003 2,80,000
Stock of finished goods on 31st December 2003 1,20,000
Ans. :
(1) Rs. 20,00,000 (2) Rs. 33,00,000 (3) Rs. 35,00,000
(d) Rs. 13,20,000
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